What flavour is your trust? Are its assets available on divorce?

Li Quan and Stuart Bray worked tirelessly during their marriage to protect the Chinese Tigers. Almost all of their assets were held within a trust (CTSAT) and the sole beneficiary was a charity that they had established for the tigers (SCT UK – Save China's Tigers UK). Li Quan argued that the trust was a nuptial settlement capable of variation on divorce. To be successful she had to persuade the court that she and her husband had benefitted from the trust assets during their marriage. The husband vociferously defended this argument – he maintained throughout the litigation that the assets within the trust were for the sole purpose of protecting the tigers and nothing else.

When making its decision, the court has to look at the true character of the trust. As well as a thorough examination of the trust documents (the trust deed, the trust accounts, any letters of wishes etc) the court must also review how the trust has been implemented. The trust documentation was clear: the sole beneficiary of the trust was the charity, and both husband and wife had been irrevocably excluded from the trust. The court also looked at what happens when the trust terminates; the trust deed provided that any residual funds would be distributed to the beneficiary SCT UK. SCT UK's articles of association confirmed that when it was wound up or dissolved any property remaining, once all debts and liabilities had been paid, would be transferred to some other charitable institution or institutions having objects similar to its objects. The documents were unambiguous – the parties would not benefit from this trust.

However, the court must then look at whether the trust has been managed in accordance with the documents. In order to answer the assertion that the parties had benefitted from the trust during their marriage, the husband commissioned a forensic accountant to perform a quasi audit of the trust. The report concluded that the trust had not been used to fund the husband or the wife save that they benefitted “incidentally” in connection with charity business. This was an important factor in the judge's decision that the trust was neither a resource available to the husband, nor a nuptial settlement capable of variation, which meant that it would not be included in the assets to be divided on divorce.

The wife appealed the decision but the Court of Appeal upheld the decision of the High Court.

Ruth Hughes (who represented the Attorney General) neatly summarised the issues to be determined by the court: “If the Judge was entitled to find the sole purpose of CTSAT to be charitable then there was no room for there to be a nuptial 'flavour' as CTSAT would have an exclusively 'Tiger flavour'.

This case provides an excellent illustration of what is required to protect trust assets on divorce: it is imperative to have your paperwork in order, but also you must have evidence to demonstrate that how the trust has been implemented, and who has benefitted, is consistent with that paperwork.

This article forms part of our Autumn 2017 family newsletter, alongside the other articles found in the Insight section below.